Continuing with our series, NFP Reporting Exposure Draft, Explained, this installment focuses on changes being considered to enhance the information provided in a not-for-profit (NFP) entity’s financial statements with regard to operations.

As a reminder, all of the proposed requirements presented in the Exposure Draft are tentative until a final Accounting Standards Update is issued.

Summary of Current Guidance

All NFPs are required to present the following on the statement of activities:

The change in net assets

The change in permanently restricted net assets

The change in temporarily restricted net assets

The change in unrestricted net assets

Beyond that, the only type of NFP with definitive guidance on the classification of revenues, expenses, gains and losses within intermediate measures on the statement of activities are business-oriented healthcare organizations. For all other NFPs, the guidance neither encourages nor discourages further classifications but provides the following options:

Operating and nonoperating

Expendable and nonexpendable

Earned and unearned

In other ways

This less rigid structure has its advantages. Every NFP is unique, and the guidance provides flexibility. NFPs can consider various classifications and select the one that best tells its unique story. However, there are disadvantages in the lack of consistency in the presentation.

Users of NFP financial statements cannot compare the results of one NFP against another, even when the two have similar operations. Many users of NFP financial statements are more familiar with for-profit entities, which present net income, and find it difficult to determine whether a NFP “had a good year” or how well the NFP is being managed.

For example, a NFP that generally breaks even may show a strong performance in a year it received a capital grant because related expenditures are capitalized as fixed assets not expenses. Without an intermediate measure of operations on the statement of activities, understanding how the ongoing operations of the NFP compared to prior years is more difficult.

For NFPs that elect to provide an intermediate measure of operations, the operating measure must be presented on the same page as the change in unrestricted net assets under current guidance.

Summary of Proposed Guidance

The provisions of the Exposure Draft require the change in two classes of net assets: net assets with donor restrictions and net assets without donor restrictions.

In addition, resource inflows and outflows would be classified between operating activities and other activities based on two dimensions: mission and availability.

The operating activities classification would include all changes in net assets that resulted from, or were directed at, carrying out the NFP’s mission and were available for current-period use. All other items, which may include investment income, endowed gifts and changes in the value of split-interest agreements, would be classified as other activities.

Within the change in net assets without donor restrictions, the proposed guidance includes two additional subtotals on the face of the statement of activities related to operating activities:

Operating excess, before transfers

Operating excess, after transfers

The second subtotal would include internal transfers resulting from governing board decisions to place or remove self-imposed limits on the use of resources, which would reclassify such resources from other activities to operating activities.

An example in the Exposure Draft provides the following classifications.

STATEMENT OF ACTIVITIES

Revenues and gains

Net assets released from restrictions

Expenses and losses

New Proposed Subtotal: Operating excess, before transfers

Board designations, appropriations and similar transfer to (from) operations

New Proposed Subtotal: Operating excess, after transfers

Nonoperating changes

Board designations, appropriations and similar transfers to (from) nonoperations

Increase (decrease) in net assets

Certain flexibility is allowed in formatting the statement of activities. The Exposure Draft further illustrates the following three options:

Single-column approach

Multi-column approach, presenting a column for each net asset class

Two-statement approach, one for operations and one for changes in net assets

NFPs that elect the two-statement approach could, but would no longer be required to, present the change in net assets without donor restrictions on the same page as an intermediate measure of operations, if provided.

About the AuthorAmanda Horvath is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. Amanda provides a wide variety of services, including financial statement audits, reviews and consulting projects involving compliance, and internal control issues. Connect with her on LinkedIn.